U.S. stock Q3 earnings season kicks off next week: S&P 500 earnings per share expected to grow by 27%, with Nvidia and Micron contributing one-third.

The US stock market's Q3 earnings season will fully kick off next week. Although the S&P 500 is expected to post its highest earnings growth since 2021, this growth is highly concentrated in a handful of tech and energy giants, while earnings momentum for small and mid-cap stocks and most industries is weakening, further intensifying the divergence between the index and individual stock performance.

According to the latest forecasts from Goldman Sachs, S&P 500 Q3 earnings per share are expected to grow by 27% year-on-year, the highest since 2021. However, this growth is highly dependent on a few companies: storage chip manufacturers Micron and Nvidia are together expected to contribute about a third of the index’s earnings growth, while the median earnings growth for S&P 500 constituents is just 9%, down from 14% in Q2.

Earnings concentration and narrowing market breadth are becoming central risks monitored by investment banks. Goldman Sachs notes that market breadth has fallen to its lowest level since the internet bubble—the S&P 500 is just 2% away from its all-time high, but the median stock has dropped an average of 17% from its recent peak.

Morgan Stanley strategist Mike Wilson believes the divergence between indices nearing record highs and the majority of individual stocks experiencing bear market-level corrections “will eventually converge in some way,” with bond market volatility likely serving as the ultimate “judge.”

Earnings growth increasingly reliant on a few stocks

According to the latest report from Goldman Sachs, Micron is expected to contribute 19% of the S&P 500's Q3 earnings growth, Nvidia 15%, with the incremental earnings from these two companies roughly equaling the combined total from the other 490 constituents.

Following close behind are Meta, Alphabet, and Broadcom, contributing 7%, 6%, and 5%, respectively; ExxonMobil, Chevron, and Marathon Petroleum are benefiting from rising oil prices due to tensions in Hormuz Strait, and Boeing also ranks in the top ten. The top 10 contributors are expected to account for 68% of Q3 earnings growth, far higher than 47% in Q1 and 48% in Q2.

Thematically, AI infrastructure is the main source of earnings growth. Goldman Sachs expects that “AI infrastructure (excluding hyperscale cloud providers)” will account for 54% of Q3 earnings growth, with hyperscale cloud providers contributing another 19%, totaling about three-quarters of S&P 500 earnings growth.

The sectoral divide is obvious as well. Boosted by tensions in the Hormuz Strait and rising oil prices, the energy sector's Q3 EPS is expected to grow by 109%; the information technology sector is expected to grow 64%, together contributing around 80% of quarterly earnings growth. By contrast, the consumer discretionary sector is expected to show virtually zero earnings growth, while the consumer staples sector is forecast to decline.

Goldman Sachs also points out that analysts expect earnings growth rates for nearly all sectors to slow down quarter-over-quarter, with information technology and communication services being the only exceptions. Since the start of Q3, profit margin expectations for median S&P 500 companies have been revised down 11 basis points, with downgrades seen in all sectors except information technology.

Micron reports first; market focus is on sustainability beyond high growth

Micron was the first to release its earnings on September 30, posting strong results: adjusted EPS of $33.42, beating the market estimate of $31.83; adjusted revenue rose from $11.2 billion in the same period last year to $54.2 billion; and gross margin reached 87%, well above last year's 45.7%. The company’s revenue guidance for next quarter is between $60–$63 billion, also significantly higher than the consensus estimate of $56.77 billion.

But the strong beat did not result in a commensurate stock price jump because the market had already priced in higher growth expectations. Morgan Stanley analyst Joe Moore noted before the earnings release that market discussions around Micron “have clearly shifted from ‘how good can it get’ to ‘how long can this momentum last.’”

Year to date, Micron’s share price is up over 231%, making it one of the best-performing stocks in the Philadelphia Semiconductor Index. With both earnings and the stock price surging, market attention has shifted away from whether short-term performance can beat expectations to whether AI storage demand and high profitability can be sustained.

Hyperscale cloud providers ramp up capital expenditure, market expectations may still be too low

The core driver behind earnings growth among AI-related companies is the continued ramp-up of capital spending by hyperscale cloud providers. The market expects these companies’ Q3 capex to grow 116% year-on-year, up from 87% in Q2. Goldman Sachs estimates that by 2027, capex growth will exceed 50%, and total spending will surpass the current market consensus of about $1.1 trillion.

Past experience shows that the market’s forecasts for capital expenditure by hyperscale cloud providers have consistently lagged actual growth: at the start of 2024, annual growth was expected to be 19%, but actual growth turned out to be 54%; in early 2025, forecasts were for 22%, with the actual number 73%; this year began with a forecast of 36%, and the current pace is nearly 96%. Goldman Sachs therefore believes the market’s expectation of 37% capex growth for 2027 is also likely too low.

Accelerating growth in cloud business revenue is also supporting this round of capex expansion. Amazon, Google, Microsoft, and Oracle saw cloud revenue growth accelerate to 48% in Q2, and Goldman Sachs expects this to rise further to 55% in Q3. Among them, the combined cloud business backlog for Amazon, Google, and Microsoft now approaches $1.7 trillion.

However, the rapid expansion of AI-related capex also brings a higher need for financing, much of it through debt. Additionally, two accounting factors boosted corporate earnings in the first half of this year: gains from the mark-to-market valuation of large tech firms’ equity stakes in private AI companies, and tariff refunds from the US Treasury.

Goldman Sachs estimates that large tech companies gained about $150 billion in Q2 from revaluing their private AI investments, equivalent to 12% of S&P 500 earnings per share; in Q3, the US Treasury refunded about $69 billion in tariffs, about 6% of US pre-tax corporate profits. Goldman Sachs has excluded the former from its quarterly year-on-year comparison and does not expect a repeat of similar gains in Q3.

Index nears record high while market breadth continues to narrow

Beyond earnings concentration, the market also shows a rare degree of concentration in performance. The top 10 stocks in the S&P 500 now account for about 40% of the index’s market capitalization and 37% of expected earnings. Goldman Sachs data shows the average realized correlation among S&P 500 constituents has dropped to 0.06, the lowest in Goldman’s decade of data, indicating the overall index performance is increasingly reliant on a handful of AI and energy leaders.

Bank of America Merrill Lynch strategist Michael Hartnett also points out that around 400 S&P 500 stocks are trading below their 50-day moving averages, and around 300 below their 200-day averages. His calculated "AI Big 10"—the Magnificent 7 plus Broadcom, AMD, and Micron—now accounts for a 42% concentration, surpassing the “Nifty Fifty” era’s 40%, the TMT bubble peak of 41%, and the 1920s level of 36%. Among comparable historical cases, only Japan's market at 44% and US railroad stocks in 1881 at 63% surpass this level.

Nevertheless, investment banks remain relatively optimistic about overall Q3 results. JPMorgan's market intelligence team upgraded its market rating to “tactically bullish” in its Q3 preview report, arguing that after 52% EPS growth in Q2, the market’s Q3 expectation of about 29% EPS growth remains conservative, and it expects all 11 sectors to achieve revenue and profit growth.

FactSet data reveals that if estimates are met, the S&P 500 will achieve revenue growth of more than 10% and earnings growth of over 25% for three consecutive quarters, with profit margins reaching their second-highest historical levels.

Goldman Sachs currently projects S&P 500 EPS to reach $375 in 2026, up 36% year-on-year; by 2027, to further rise to $415, setting year-end targets at 8000 points and 12-month forward target at 8700 points.

As the largest component in the S&P 500 and the second-largest earnings contributor in Q3, Nvidia will report earnings in the third week of November. In the current environment of highly concentrated earnings, its performance and guidance on future AI capex and demand could be the key trigger in determining whether this US stock earnings rally can continue.